AM Best has revised the outlook to negative from stable for the Long-Term Issuer Credit Rating (Long-Term ICR) and affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term ICR of “a+” (Excellent) of Farmers Mutual Insurance Company of Nebraska (Farmers of Nebraska) (Lincoln, NE). The outlook of the FSR is stable.

In addition, AM Best has assigned a Long-Term Issue Credit Rating of “a-” (Excellent) to the $100 million, 9% surplus notes, due May 2044, issued by Farmers of Nebraska. The outlook assigned to this Credit Rating (rating) is negative.

The ratings reflect Farmers of Nebraska’s balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).

The revised Long-Term ICR outlook to negative for Farmers of Nebraska reflects a deterioration in policyholders’ surplus due to significant underwriting losses driven by weather events the company experienced in 2022 and to a lesser extent in 2023. As a result of the deterioration in surplus, some balance sheet strength metrics have begun to trail similarly rated peers. The issuance of the surplus notes should mitigate surplus deterioration but exposes the company to potential strains from debt servicing, which could have a negative impact on future operating cash flows.

The company balance sheet strength assessment of strongest is supported by its risk-adjusted capitalization being at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). Additional factors include the companies’ favorable liquidity and generally consistent and favorable loss reserve development, which are partially offset by underwriting leverage and reinsurance dependence metrics that are modestly above the composite’s average. The adequate operating performance reflects the company’s continued underwriting discipline, despite significant losses seen in 2022 and net income in just three of the past five years. The neutral business profile continues to focus on the company’s market-leading position in the personal lines business in its core states of Nebraska and South Dakota. Farmers of Nebraska’s ERM program is considered appropriate for its risk profile and includes prudent reinsurance protection with comprehensive risk mitigation strategies.

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